Preliminary Financial Analysis Model

Transcription

1 Powder River Basin (PRB) Coalbed Methane (CBM) Preliminary Financial Analysis Model Presented by W. Thomas Goerold, Ph.D. Owner, Lookout Mountain Analysis Natural Resources Law Center Coal-bed Methane Conference April 4 & 5, 2002

2 Objectives Methodology Assumptions Results Preliminary Conclusions

3 : Objectives

4 Objectives: Construct representative financial model(s) of coalbed methane production projects Ultimately, include wells that represent CBM production in all parts of the PRB Extend financial model to cover different scales of operation

5 Objectives Examine the financial and economic impacts of different water disposal options

6 Objectives Serve as a comparison to check results and impressions obtained from other sources E.g., Other possible sources include EPA, industry groups, conservation groups, other stakeholders

7 : Methodology

8 Methodology Currently at very preliminary stage of evaluation Discounted cashflow analysis (DCF) Standard industry project evaluation practice Same tools used by PRB CBM firms for different projects evaluation

9 Methodology: Primary Data Sources Morgan Stanley Dean Witter Research on Coal Bed Methane (4/10/00) EPA website Feasibility Study: Water Placement Related to Coalbed Methane Gas Production, Hanging Woman Basin Project, Caribou Land & Livestock Montana, LLC (12/17/01) Coal Bed Methane Operators Information Survey Results, Standard industry evaluation practice

10 Methodology Model project costs and revenues over life of project 9 years 15 years Annualize cost and revenue components to directly compare impacts with different patterns

11 Methodology Revenue items Henry Hub spot gas price BTU Adjustment Gas Transportation in Pipeline Shrinkage, Compression, Field Use Adjustments Henry Hub (LA) Spot gas price + Adjustments = Wellhead Gas Price (Netback)

12 Methodology Cost items Initial capital costs: drilling, completion, pro-rata pod construction (inc. surface water disposal) Additional water disposal capital costs Operating costs (except addl. water disposal) Additional water disposal operating costs

13 Methodology Cost items Lease, rental, royalty costs Severance tax Federal, state income taxes Include various depletion, depreciation, intangible drilling cost (IDC) scenarios Excess of Revenues over costs = Abovenormal profits

14 Methodology Use discounting (discount rate concept) to value current costs and revenues more than future ones Express costs and revenues as life-ofproject values

15 : Assumptions

16 Assumptions Revenues: Current Price Natural Gas Price: Current NYMEX Henry Hub Spot Price of $3.69 per MCF (4/3/02) Other revenue assumptions from Morgan Stanley Dean Witter analysis

17 Assumptions: Base Case Modeled Field Characteristics (source: EPA from WOGCC, COGCC, and Montana DNR Data) Based on actual 12-well project: High Production, Medium Efficiency Use characteristics of one of the older PRB CBM fields East, Fairway N field Average 1000 foot depth

18 Assumptions Field Characteristics Max. water/max. gas ratio = 1.37 Max water output = 96,000 Bbl/year Max gas output = 70,000 Mcf/year Gas decline = 13 percent/year Water decline = 30 percent/year

19 Assumptions Water discharge Model includes minimal water surface discharge costs in generalized capital and operating costs Alternative water discharge scenarios describe water treatment and handling facilities over and above minimal surface discharge

20 : Results

21 Results Base Case, Current Price Scenario Wellhead (Netback) = $2.62/Mcf Costs Base case: NPDES-permitted surface water disposal

22 Base Case, Current Price Scenario Cost Items ($2.62/Mcf Wellhead, 41% ROI) Surface Water Disposal Above-Normal Profit, $0.77 Capital (drill,complete,pod/well), $0.43 Capital (water disposal), $- Operating (lifting), $0.26 Operating (water disp.), $- Fed State Tax, $0.26 Gathering, $0.50 Severance, $0.19 Royalty, $0.62 Lease,rental, $0.09 Primary sources: water disposal costs: Hodgsen, 2001, (Marathon Oil), general costs: EPA, website, Caribou Land and Livestock, Coalbed Methane Operators Survey Results, Morgan Stanley Dean Witter research Primary sources: General costs: EPA, website, Caribou Land and Livestock, Coalbed Methane Operators Survey Results, Morgan Stanley Dean Witter research

23 Results Base Case, Current Price Scenario ($3.69/Mcf) Surface water disposal scenario Total capital cost (w/o addl. water disposal) = $0.43/Mcf Total operating cost (w/o addl. water disp.) = $0.76/Mcf Lease, rental, royalty costs = $0.71/Mcf Severance, income taxes = $0.45/Mcf Above-normal profit = $0.77/Mcf Total Return on Investment (ROI) = 41 Percent

24 Base Case, Current Price Scenario Cost Items ($2.62/Mcf Wellhead, 28% ROI) Deep Well Injection/Wastewater Treatment Water Disposal Above-Normal Profit, $0.62 Capital (drill,complete,pod/well), $0.43 Capital (water disposal), $0.21 Fed State Tax, $0.18 Operating (lifting), $0.26 Severance, $0.19 Operating (water disp.), $0.013 Royalty, $0.62 Lease,rental, $0.09 Gathering, $0.50 Primary sources: water disposal costs: Hodgsen, 2001, (Marathon Oil), general costs: EPA, website, Caribou Land and Livestock, Coalbed Methane Operators Survey Results, Morgan Stanley Dean Witter research

25 Results Base Case, Current Price Scenario ($3.12/Mcf) Deep well injection/wastewater treatment water disposal scenario, 2640 feet of piping to link production well w/ disposal well Differences from Base Case Surface water disposal Total additional water disposal capital cost = +$0.21/Mcf Total water disposal operating cost = +$0.013/Mcf Severance, income taxes = -$0.08/Mcf Above-normal profit = -$0.15/Mcf Total Return on Investment (ROI) = 28 Percent (-13%)

26 Base Base Case, Current Price Scenario Cost Items ($2.62/Mcf ($2.71/Mcf, Wellhead, 23% 28% ROI) Rapid Spray Evaporation Water Disposal Rapid Spray Evaporation Water Disposal Above-Normal Profit, $0.61 Capital (drill,complete,pod/well), $0.43 Capital (water disposal), $0.19 Fed State Tax, $0.17 Operating (lifting), $0.26 Severance, $0.19 Operating (water disp.), $0.056 Royalty, $0.62 Lease,rental, $0.09 Gathering, $0.50 Primary sources: water disposal costs: Hodgsen, 2001, (Marathon Oil), general costs: EPA, website, Caribou Land and Livestock, Coalbed Methane Operators Survey Results, Morgan Stanley Dean Witter research

27 Results Base Case, Current Price Scenario ($2.71/Mcf) Rapid spray evaporation water disposal scenario Differences from Artificial wetland water disposal Total water disposal capital cost = +$0.19/Mcf Total water disposal operating cost = +$0.056/Mcf Severance, income taxes = -$0.09/Mcf Above-normal profit = -$0.16/Mcf Total Return on Investment (ROI) = 28 Percent (-13%)

28 Results Base Case, Breakeven Scenarios NPDES-permitted surface discharge Deep well injection/wastewater treatment Rapid spray evaporation Solve for gas price needed to achieve minimum ROI (7% - EPA assumption)

29 Results Base Case, Breakeven Scenarios, 10% ROI Surface discharge = $2.23/Mcf, 7% ROI Deep well injection/wastewater treatment =$2.50/Mcf (+$0.23/Mcf), 7% ROI Rapid spray evaporation = $2.54 (+$0.31/Mcf), 7% ROI

30 : Preliminary Conclusions

31 Preliminary Conclusions Current Price Case shows profitability in all water disposal cases Most expensive water disposal options modeled reduce above-normal profit by about $0.15- $0.16/Mcf and reduce ROI about 13%

32 Preliminary Conclusions Breakeven Scenarios required a gas price increase of $0.23 to $0.31 to pay for additional water disposal costs of Deep well injection/wastewater treatment or Rapid spray evaporation over Surface discharge

33 Preliminary Conclusions Future Needs Model different basin areas, different scales, different water/gas ratios Refine costs, especially alternative water disposal costs Compare with other financial models, e.g., EPA, PRB CBM operators, stock analysts, others

34 : Appendix: Natural Gas Spot Prices

35 CBM Financial Model: Assumptions